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COVER STORY - Blair's industrial revolution

Tony Blair has turned Labour into a party that is prepared to work with business and to understand how business works. But it is also clear that he is still learning from British managers, not yet leading them.

The Labour Party Web site is an interesting browse. As you might expect from the masters of spin, there’s not much of substance on there: the “weekly briefings” date back only a month, only two conferences are advertised and there is absolutely no information on policies at all.

But on the “Party Information” page, the first two links are “How to Join” and the “Labour Party Shop”. Not that we were in any doubt, but it is yet another indication that the “party formerly known as socialist” has started to acquire a little business acumen.

But despite New Labour’s apparent conversion to business, neither Tony Blair nor Gordon Brown has yet achieved iconic status amongst the country’s senior managers. Whilst far from being the definitive opinion on Labour’s performance in power, one FD we spoke to recently admitted, “I don’t think they’ve done very much either way.

It’s been fairly static, with a little tinkering in the Budgets. The first two years of Labour have been pretty nondescript, really – probably not as bad as people thought it would be.” In other words, taken in the context of the past ten years, if you had fallen asleep towards the end of 1996 and woken up again six months later, you might never have known an election had taken place. That is not to say that Blair & Co have not worked hard to achieve that result.

The revolution to transform Labour into New Labour goes back a long way – long before the party regained power two years ago. Michael Foot was the last leader who showed any real commitment to socialism, Neil Kinnock the last to use the word with Old Labour fervour. But Kinnock, despite his failings, did drag the party kicking and screaming into the 1990s, and handed over a far superior product to John Smith when he took the reins in 1992.

It was Smith who first seriously courted the business and financial communities, most famously by joining the “prawn cocktail circuit” around the City in an attempt to persuade them that Labour, while not being hewn from the same capitalist rock as the Tories, were still benign and eager to learn. Being ‘benign’ sounds negative, but it was the best possible story to tell. Many British business leaders still remembered the disastrous interventions of former Labour governments. So even under Kinnock, key Labour politicians were making important noises about the ability of the market to dictate “policy”.

Some wags even dubbed the then shadow Chancellor’s business policy as “Smitheltine” for its close resemblance to Michael Heseltine’s own brand of values-based Conservatism. But even in the late 1980s and early 1990s, when Labour was discovering a new vocabulary for business – eschewing emotive words like “nationalisation” in favour of “common ownership” – its naivety and lack of natural instinct for business shone through. John Prescott, as late as 1990, was still talking about “areas (in this case, BAA) which we are going to turn into public utility companies. We are not going to leave them as private sector companies.” Blair, with his coterie of spin doctors, instinctively knew that in order to gain electoral credibility and the support of business he would need to get his party thinking like capitalists, not just talking like them. His own credentials as a reformer were certainly not in doubt (see Flashback, page32), and without the deeply socialist background of many shadow cabinet colleagues – such as John Prescott – he found it easier to win over the sceptics who felt New Labour was just a front for a hard-core of socialist interveners.

In this context it was essential to clean out the party with mass expulsions and to ditch Clause IV. Such baggage could only reinforce the “Trojan horse” theorists’ view of the new party. Kinnock, despite all his reforming efforts, could never have accomplished this; he would never have been allowed to forget either his avowedly socialist past (complete with CND membership) nor the press gaffes which Blair has fought so hard to avoid. So defeat at the 1992 election was, with hindsight, not that surprising. The message may have changed but, particularly as far as cautious capitalists were concerned, the medium was still the same. But had the problem of the medium – as opposed to the non-socialist message – really changed by the time of the last election?

Blair’s Revolution, following those of Kinnock and Smith, placed more store on convincing the electorate that it welcomed dialogue with business rather than being intuitively in touch with business itself. It was the first time Labour went to the polls with the avowed aim of trying to understand and work with the business community, rather than fight with the unions against business. Gordon Brown, for example, in January 1997 claimed “Some people say our aim is reassurance. It is more than that. We seek a dialogue, leading to a new understanding in which government, entrepreneurs and companies together promote competitiveness and opportunity.”

In the same speech, the key points Brown put forward were stability and low inflation, tough rules on public expenditure, high levels of investment (all tackling key problems traditionally associated with Labour), new skills (to match the Blair mantra of “education, education, education”) and constructive engagement with Europe (the central rift in the Tory party).

Hardly a supremely pro-active response to the business community – yet, in fact, not at all bad. Speeches being given around this time to City financiers by opposition Treasury spokesman Alistair Darling could easily have been written for him by former Chancellor Geoffrey Howe in 1981. Meanwhile, the Tories’ claim to be the true party of business and sound economic management had, by 1997, been badly undermined by crippling recession and the kind of currency crisis more usually associated with Labour. Blair’s Revolution in that context was simply to stay “on message” and reassure business (despite Brown’s protestations) that Labour would not create any problems.

After 18 years, many in the country – including many business leaders – were suffering “Tory fatigue”. In fact, the Conservatives had done much of Blair’s work for him: only 39% of FDs, according to a pre-election poll in Accountancy Age, remained aligned with the Conservative party, with a massive 40% undecided. “Fed up with the Tories?” Blair was asking business. “Don’t worry: we’ve removed the reasons not to vote Labour.” The record in the first two years, at least on a macro level, seems to bear this out. Far from plunging the economy into recession, Brown’s prudence has helped ensure a relatively soft landing. While former Labour leaderships may have felt more attached to manufacturing industry, Blair the revolutionary now speaks of the “knowledge-driven economy”. Manufacturing has continued to decline under Labour. But the party still retains, albeit in a toned-down form, a commitment to social reforms.

The Social Chapter has been introduced, for example, along with the minimum wage. This is a good example of Blair playing off the party’s conscience (with unions seeking a £4.26 hourly minimum) against the concerns of business, and settling on the £3.60 an hour rate (with a lower level for young workers). “Not as bad as people thought it would be,” indeed. Even so, it is possible to level a charge of uncertainty against Blair’s revolutionaries.

On the Competition Act, for example (see Insight, page 9), there are concerns at the power the regulators now have. True, the act more or less had to be introduced in order to comply with European law. But New Labour still grasped the opportunity presented by the euro-directive to regulate business with thinly-disguised zeal. It is widely believed in legal circles that the new act will leave British businesses operating in one of the most heavily regulated competition environments in the world.

“Cynics will say that the whole reason Labour is interested in competition law is because they didn’t have the money to re-nationalise the utilities,” says Paul Hughes of law firm Edge Ellison. “Having got rid of Clause IV, this is a back-door mechanism to regulate those privatised industries.” Red tape is a common theme running through this Labour administration’s first two years. Despite Blair’s claim back in the mid-1980s that it was a “schoolboy” issue, both small businesses and large corporations have suffered increasing burdens of compliance under Labour. The Working Time Directive, late payments legislation and the proposal for Family Tax Credits all increase red tape.

Moreover, the administrative cost of corporate tax self-assessment (not to mention the penal rates of interest for incorrect payments on account) and the cashflow cost of having to make quarterly payments all offset the recent headline grabbing cut in the rate of corporation tax.

Abolition of advance corporation tax and, in particular, the tax credits that pension funds used to be able to reclaim on dividends, reflected an Old Labour suspicion that “City institutions” were squeezing much needed investment funds out of companies. But Blair is certainly a well-meaning revolutionary. Take the millennium bug problem as an example: it was admirable that he should take a personal interest and put state funding behind the “bug-buster” training programme. But while a privately-run organisation – Taskforce 2000 – started early and had made a great deal of headway in publicising the problem and giving advice to business, the government’s own Action 2000 unit has proved limp-wristed at best.

Even the bug-busters scheme failed to generate the hoped-for thousands of programmers, and has been a little late in arriving in any case. In other respects, one can argue that Blair has recognised this lack of understanding of business and has sought to bring in advice from outside. Lords Simon and Sainsbury, for example – former FDs and chairmen of BP and J Sainsbury, respectively – have been important additions to the Blair team.

And Gordon Brown’s hand over of interest rate controls to the Bank of England reassured business that Labour was not going to tinker – and put rate-setting in the hands of experts. In this last case, however, Brown has come in for some stick. Some economists and business leaders have argued very effectively that by making inflation control the only remit of the Monetary Policy Committee, British business – and especially Labour’s traditional heartland of manufacturing industry – has suffered. Allowing the MPC to factor in growth and balance of trade might have been more business-friendly. Labour may not have developed many core competencies for business. But it has certainly shed its old core incompetencies. The unions have remained toothless – Labour knew they were both bad for business and unpopular with the electorate.

Nationalisation is dead – in fact, New Labour is open-minded enough to have even considered privatising the Post Office. But above all, despite his revolutionary zeal, despite an undoubtedly “New” view of the relationship between the left and business, Tony Blair has yet to become the poster-boy of corporate Britain. Some business people might not want him to be. Less meddling is the key – not necessarily a more pro-active stance. But for Tony to achieve the iconic status of, say, Margaret Thatcher, the Blair Revolution will have to go much further and new, untainted left-wing capitalists will have to become part of the team. Labour, it seems, has proved itself good at not being very bad.

BEFORE THE BLAIR REVOLUTION: WHAT THEY SAID IN 1989

Public comments during a revolutionary phase are a dangerous hostage to fortune. Some of New Labour’s top politicians have murky pasts, but with typical revolutionary zeal, their histories have been consigned to the dustbin. A reminder, for readers with short memories, of where Labour stood 10 years ago, before the Blair Revolution had changed the minds of Labour’s leaders: John Prescott: “There is no way that the Labour Party can be distanced from the trade unions. (A future Labour government) is going to repeal all (Tory anti-union legislation), there’s no little bits you can keep of it.”

Gordon Brown (supporting entry to the ERM): “The choice is whether we want our exchange rate to be at the mercy of uncontrollable market forces or managed properly, nationally and internationally, so as to secure economic growth and stability.”

John Smith (on controlling inflation): “The first requirement of an alternative approach is to adopt an industrial strategy. The second leg of our approach is to lessen the exclusive reliance on high interest rates by the adoption of sensible controls on the availability of credit.” Neil Kinnock: “You do not get the development of manufacturing industry, or the improvement of training, or the investment in research and development, or the proper investment in the productive infrastructure that we need to make our economy strong if the government is relying on an interest rate strategy which depresses economic performance.” But one member of the shadow front bench in 1989 was clearly the most committed revolutionary in Labour’s ranks.

Tony Blair was re-shuffled that year from the energy to the employment portfolio. “I would not fancy being Minister for Advertising, but I would quite like to go to the Department of Trade and Industry,” he said. Soundbites, like form, may be temporary; but spin, like class, is permanent.

HAS LABOUR FULFILLED ITS BUSINESS MANIFESTO?

A reasonable assessment of the government’s relationship with business can be gleaned from how well it has lived up to the message it put out in the Business Manifesto for the 1997 general election. “It is business not government that creates lasting prosperity,” Gordon Brown wrote in the foreword. “To bring about the fair and prosperous society that Labour seeks, we need successful and enterprising businesses making strong profits.”

To the credit of the media managers, this central theme remains the core message of Labour’s economic policy two years later. Labour made five key pledges in the Business Manifesto:

“1. Stable prices with a target set to achieve inflation of 2.5 per cent or less, tough rules on borrowing and spending, and no rises in income tax rates.” Brown scores well here, and businesses are certainly happy that inflation is low. But it is only indirectly Brown’s doing – the MPC must take the lion’s share of any credit, even if the Chancellor did empower it in the first place. Income taxes, which grab headlines for the voter in the street, have not just been frozen, but actually dropped. And Brown has managed to stay in line on the borrowing front, although the UK economy is going to have to live up to his bullish predictions in this year’s Budget if borrowing is not to increase.

“2. New drive for public/private partnerships to modernise, for example, the transport network.” Labour has re-branded the PFI (in favour of the more politically correct “public/private partnerships” phrase), and slightly restructured it to reduce some of the regulatory logjams it suffered under the Tory administration. The transport network remains a huge problem that is still in search of a solution – the truckers, tube drivers and commuters would probably agree transport is no better under New Labour than it was under the Tories. The government’s Transport White Paper simply did not have enough detail on how infrastructure would be improved to give Brown full marks on this.

“3. A skilled workforce – by cutting class sizes, setting new targets for literacy and numeracy and a new University for Industry for Lifelong Learning.” Although businesses are keen to have an educated workforce (a recent IoD survey found it a major concern for British board members), even smaller classes will not help businesses for at least half a generation. The “University for Industry” plans to use the Internet and CD-ROMs to help people gain new skills. That programme is due to be rolled out late in 2000, but it has hardly been high profile in the first two years, and has huge potential to be a white elephant.

“4. Leading reform in Europe, promoting competition and opening markets so that British business gets the best deal.” A little vague. Under New Labour’s regime, the meat industry might argue it has been slightly hampered in exporting to European markets. The Common Agricultural Policy certainly needs reforming, but it has not been. And foreign markets would be more open to British business with a lower pound, but interest rates, as we know, move to solve the inflation problem, not help exporters.

“5. Full backing for small business with legislation to end late payment to small firms and extra support to help small businesses grow.” Late payment legislation has been passed. But it is too easy to dodge, and in any case, many small firms found the worst offenders to be local and national government. The “Enterprise Zone Internet site” – one of the manifesto’s few promises to small business – appears to be nothing more than a small handful of links to other organisations’ Web addresses. A poor show.

BLAIR BEFORE THE REVOLUTION

Two years of power may have re-assured business that Labour isn’t quite the socialist ogre of old – and even taught it that Labour has learned that successful, expanding and forward-looking companies are the foundation of any programme for social change – but the Blair Revolution began some time before he won his landslide victory in 1997. Consider this Blair quotation from the archives of Financial Director: “As far as possible, businesses like to be left alone,” he told FD. “Throwing government money at state projects is not a very sensible way of allocating resources.”

Now guess when we interviewed Blair. 1997, before the election? 1994, when he became Labour leader after the death of New Labour precursor, John Smith? Or was it after the defeat in 1992? Actually, we spoke to Tony Blair, then shadow Treasury spokesman, in 1985, well before the addition of the “New” to Labour and a seeming aeon before Clause IV was repealed, throwing socialism into a dark age. Remember this was just two years after Michael Foot took Labour to a record defeat, weighed down with policies on nationalisation, nuclear disarmament and tax rises.

Blair was actually commenting on the white paper “Lifting the Burdens” which was being presented to parliament by Lord Young, that paragon of the traditional Tory businessman-turned-politico. The proposal was aimed at reducing the cost to small businesses of red tape, which is still a major concern to the struggling entrepreneur. But Blair had no time for petty meddling, calling Young’s draft “pretty old hat type of politics”.

“Cutting red tape is the sort of platform you put up in school mock elections,” he declared. Pretty tough stuff from a relative new boy – back then, Blair had only been an MP for two years. (We’ll gloss over the fact that one of Blair’s six points to “give Britain’s entrepreneurs and small businesses the backing they need” in April 1997 was to “cut red tape”.)

FD writer Nick Kochan saw in the young pup the first stirrings of a new relationship with capitalism. “Businessmen are likely to find Blair a reassuring figure in the Labour party,” he wrote. “He has clearly learned from the troubled experiences of his forebears on the front bench … His views represent a more considered response to the business sector than that which his side of the house has shown for some time.”

Kochan also repeated the story of how Tory grandee Edward DuCann had “patted him (Blair) on the back when welcoming the new intake after the last election, only to be told that he was on the other side.” It seems that the more recent jibes about “Tory Blair” have a historical precedent which gives Tony’s smooth capitalist credentials some justification. More recently, we could not help but notice what a difference John Smith, then his successor Tony Blair, had made on the image of Labour in business circles. “What’s going on?” asked politics columnist Gary Duncan in 1995. “The Labour Party is moving rapidly in line with the mainstream business view of Europe, while the Tories are in peril of turning into a bunch of flag-wavers.

#No wonder directors are becoming confused about where to place their loyalties.” Sure enough, less than two years later, Europe was a key battleground won by Blair. Immediately after the election, we had to stand back and admire the transformation in Labour. While it’s perfectly natural that in the 23 years between the last two Labour election victories the party should have changed, the adeptness with which the new regime took to the business world was remarkable. “Business may have some reservations about Britain’s new political era, but there are good grounds for it to go into this future in a spirit of constructive optimism,” said Duncan in June 1997.

Love Blair or loathe him, you would have to say this optimism has, at least in part, been justified. One other historical note worth dredging up: in June 1985, we analysed business contributions to political party coffers. We scoffed at how little the Alliance (Liberal/SDP – remember that?) was given, and looked at the generosity of donations to the Tories. Labour did get a mention – as trying to get the other parties to reveal their donors. Bernie Ecclestone, anyone?